The U.S. economy remains turbulent as Americans continue to endure implemented public safety measures. But a silver lining is that as a homeowner, you can still find cheap and affordable credit within mortgage markets amidst all the chaos.
The average 30-year fixed-rate mortgage fell to 2.81% in mid-October, which is the 10th time in 2020 that rates have hit record lows1. Furthermore, rates for jumbo and FHA mortgage programs have also set record loans for the start of November2.
Property values have also increased tremendously over the last year, freeing up available equity for homeowners makes it a perfect time to complete planned improvements or postponed renovation projects.
Yet despite favorable market conditions many borrowers are still experiencing long turn times on standard refinance transactions regardless if they are pulling out cash or completing a simple rate-term refinance.
So why is refinancing taking so long? There are a lot of factors at play, but the sheer volume and tighter standards are certainly factors at play. If you are looking to refinance, here are the top 5 reasons why it may take longer than you think.
Tighter Lending Standards
It’s no surprise that COVID-19 has even seasoned economists uncertain as to the trajectory of the U.S. economy. If you throw the presidential election into the mix, opinions continue to fluctuate wildly.
But the bottom line that borrowers will have to face is a movement toward tighter credit standards (at least in the interim). According to the Senior Bank Loan Officers Survey conducted by the central bank between late-September and mid-October, many respondents anticipate a lower risk tolerance as the economic outlook remains uncertain3.
Earlier this year large lenders such as JP Morgan Chase and Wells Fargo reported that they will be cracking down on borrowing standards for new home loans. JP Morgan Chase specifically will be requiring borrowers applying for a new mortgage to have a credit score of at least 700 and make a down payment of at least 20% for purchase transactions4.
The number of borrowers taking advantage of mortgage relief (such as forbearance) also has lenders spooked. Tightening the lending standards will allow lenders to spend more time completing due diligence which may translate into a few extra days underwriting and processing a file that, for a straight-forward refinance transaction, previously took less time to approve.
Part of having stricter lending requirements means lenders have to complete additional verifications when underwriting and processing files. One of the biggest reasons files can be delayed is if these verifications indicate any majors or red flags to the stability and continuity of income.
For example, lenders have to be additionally stringent when paystubs or written verifications of employment indicate reduced or fluctuating hours or pay. If you are a borrower that relies on a variable income, expect your application to take longer than if you had a standard non-fluctuating salaried position.
Additional requirements have also been imposed on self-employed borrowers since they are considered to have enhanced risk compared to borrowers with standard employment. If you are a self-employed borrower, expect to now have to provide a YTD profit and loss statement and business bank statements in addition to any standard documentation, such as business and personal tax returns.
Lenders are also required to verify a borrower-owned business is in existence within no more than 120 days prior to the note date, however, due to COVID-19 lenders are now also required to make sure the business is also open and operating at pre-pandemic levels within 10 business days prior to the note date as well5.
Increased Application Volume
Overall, as a result of favorable market conditions more and more borrowers are applying to refinance. The problem is that many lenders are at capacity and are having trouble keeping up with demand. Purchase activity is over 25% higher than it was a year ago and refinance applications are seeing significant gains7.
As volume remains consistent or increasing for the foreseeable future, lenders are looking for creative ways to meet growing consumer demand. One way lenders are able to take on additional volume is by taking on longer rate lock periods.
This gives the lender more time to deliver a loan to their respective investor. However, it also means that a normal refinance that would have typically taken 20-30 days to close will now take 45-60 days on average.
Lack of Staff, Tools, and Digitization
Like other industries lenders have also been impacted by the economic shutdown from earlier in the year caused by the pandemic. Several companies have cut down on staff to reduce costs even though volume has stayed consistent or ramped up, as a way to hedge against future volatility. As competition remains high, costs to churn out approvals faster impact profitability.
Furthermore, the mortgage industry has been living in the Dark Ages until just recently over the last 3-5 years. While many of the larger companies with the most market share have been able to digitize many of the processes, the majority of small and mid-sized lenders are working with less sophisticated tools and technology which can bog down the application process and overall customer experience for borrowers.
Paperwork Is Still High
In some ways, the financial crisis of 2008 resulted in several benefits for consumers looking for a new mortgage, including additional transparency and protections. Lenders are now required to disclose an overwhelming amount of data that wasn’t required in the past. But this is a double-edged sword.
I think most would agree that transparency is important, but it can also impact the processing of simple mortgage transactions. Back in 2013, the Mortgage Bankers Association noted that the average mortgage application file included upwards of 500 pages6. While some processes have been able to reduce the amount of paperwork involved in typical mortgage transactions today, the amount is still staggering.
Will certain tools such as design and enhanced automated underwriting have helped to digitize some processes, waiting around to make sure every disclosure and piece of documentation has been sent and signed by the borrower can make the process seem painstakingly long.
1 Winck, B. (2020, October 15). Mortgage rates hit 10th record low of 2020, further fueling the US housing market’s boom | Markets Insider. Retrieved November 5, 2020, from https://markets.businessinsider.com/news/stocks/mortgage-rate-fall-record-low-housing-market-boom-sales-cause-2020-10-1029685635#:~:text=For the 10th time this,going back nearly 50 years.
2 DianaOlick. (2020, November 04). Jumbo and FHA mortgage rates set record lows, juicing refinance demand. Retrieved November 5, 2020, from https://www.cnbc.com/2020/11/04/jumbo-and-fha-mortgage-rates-set-record-lows-juicing-refinance-demand-.html
3 Charm, N. (2020, October 30). Lenders expect tighter lending standards in fourth quarter. Retrieved November 5, 2020, from https://www.bworldonline.com/lenders-expect-tighter-lending-standards-in-fourth-quarter/
4 CNBC Business News. (2020, April 13). JPMorgan Chase to raise mortgage borrowing standards as economic outlook darkens. Retrieved November 5, 2020, from https://www.cnbc.com/2020/04/11/jpmorgan-chase-to-raise-mortgage-borrowing-standards-as-economic-outlook-darkens.html
5 Freddie Mac. (2020, March 31). Selling Guidance Related to COVID-19. Retrieved from https://guide.freddiemac.com/app/guide/bulletin/2020-8
6 Christie, L. (2013, December 12). 500-page mortgage applications have become the new normal. Retrieved November 5, 2020, from https://money.cnn.com/2013/12/12/real_estate/mortgage-applications/
7 Swanson, J. (2020, November 04). Refis Help to Boost Mortgage Application Volume. Retrieved November 5, 2020, from http://www.mortgagenewsdaily.com/11042020_applications_forbearance.asp